Owners uneasy about tax collection legislation

Small-business owners may be closer to losing an advantage they've enjoyed during the e-commerce boom — being exempt from collecting sales tax in states where they're not located — and they're worried they will have to spend more money in the process.

Under federal law, a state or local government cannot force a company to collect sales tax on a purchase unless the business has a physical presence in that state. The physical presence could range from an actual store to an office, warehouse or distribution center. The sale could be conducted online, over the phone or through mail order.

The arrangement saves money for shoppers who compare prices online.

But Washington lawmakers have several bills in the works that would end all that by forcing companies to collect the tax. Businesses are split over the issue.

On one side are small retailers who say they wouldn't be able to bear the costs of collecting the tax and filing reports and tax returns that are required by state and local governments. They're worried they'll have to buy software, hire staff and keep up with collecting state and municipal taxes.

Headsets.com, for instance, might have to hire two staffers to handle the administrative work if what's called remote tax collection becomes law, says CEO Mike Faith. The company has operations in California and Tennessee, but sells to all 50 states. Federal law only requires the company to collect tax in those two states.

“It's useless employment. It doesn't add value to the company,” he says. “It's just another cost burden.”

On the other side are in-state sellers and larger retailers with physical locations dotted across the country who sometimes lose business to competitors who don't have to collect the tax. Even if two retailers charge the same price for an item, many shoppers, to reduce their overall cost, will choose the seller that doesn't collect taxes.

“It's a problem that needs to be addressed. It's an unlevel playing field,” says David French, a lobbyist for the National Retail Federation.

On yet another side are the state and local governments that stand to collect billions in heretofore uncollected revenue. States have wanted the tax money for decades and are particularly anxious for it now. The combined budgets of all the states had deficits of more than $100 billion a year from 2009 through 2012, primarily because of the drop in tax receipts during and after the recession, according to the Center on Budget and Policy Priorities, an organization that studies tax issues.

The payoff could be substantial. In 2012, there was much as $11.4 billion in uncollected taxes on Internet sales alone, according to an estimate by University of Tennessee researchers.

State and local government officials have wanted to change the law for years, even before the catalog boom of the 1980s and the Internet boom of the 1990s.

Small-business owners have resisted along the way. They argue that the burden of keeping up with the estimated 15,000 different sales tax rates — charged by the 7,500 to 9,600 state, county, city and town jurisdictions — is just too much.

For example, Elgin, Ill., a suburb of Chicago, is in two counties, Cook and Kane. In Cook County, Elgin's sales tax on general merchandise is 9.25 percent. In Kane, it's 8.25 percent. The state's base sales tax is 6.25 percent.

What is taxed also varies widely. In Massachusetts, baby oil is tax-free, but baby lotion and powder aren't. In states including New York, there's a tax on shipping charges. Others, including California, don't charge if you get merchandise delivered by the U.S. Postal Service or services such as UPS and FedEx.

Many sellers have felt protected by a 1992 U.S. Supreme Court ruling that states could not force out-of-state sellers to collect sales tax. But the court, in effect, invited Congress to create a law that would give the states the authority to require that taxes be collected.

Three bills were introduced in the last Congress that would authorize the states to require remote sellers to collect taxes. In the U.S. Senate, the Marketplace Fairness Act had bipartisan support, but did not come to a vote. Sen. Dick Durbin, D-Ill., one of the bill's sponsors, has told The Associated Press the bill was tabled because of concerns by Sen. Max Baucus, D-Mont., about the burden that tax collection would place on companies in his state, where there is no sales tax.

But the burden small-business owners fear may not be as bad as they think. The government would likely require that states make the process easier for small companies, and the smallest of these businesses are expected to be exempt. The proposed Marketplace Fairness Act exempts businesses that have $500,000 or less in sales from remote states. But Durbin says that number is open to negotiation. and the tax computation software will have to be user friendly. “This is the only way we can sell this,” he says.

In 1999, the National Governor's Association and the National Conference of State Legislatures created the Streamlined Sales Tax Agreement to make taxes easier to collect. The Streamlined Sales Tax Governing Board was formed to carry out the agreement. To help reduce the hassle of tax collection, the board contracted with software developers to come up with programs to compute the correct tax.

One such program, TaxCloud, is designed to keep track of changes in state and local tax laws and will file sales tax returns on behalf of sellers, according to David Campbell, CEO of The Federal Tax Authority.

Laura Zander, a retailer of yarn and sewing suppliers, is skeptical. She also has a background in software development.

“It's really easy, free software, but it's never that simple,” says Zander, owner of Jimmy Beans Wool in Reno, Nev. “You just can't program it as easily as they say you can.”

Zander, who had $6.5 million in sales last year, says, “Think about the complications — on a monthly or quarterly basis, filing and tracking payments. That's an extra $50,000 or $75,000 a year in programming fees, bookkeeping, management. That's a lot.”

The Electronic Retailing Association, a trade group that's fighting the legislation in Congress, also says it will be expensive for sellers to comply.

“Even if you have software that's good, to integrate the coding on the (seller's) end of these elaborate sales systems is a pretty big thing — even for an Amazon,” says Bill McClellan, vice president for government affairs for the ERA. “That will leave these little guys out in the lurch.”